Educational Articles

Drug Roundup – March 1, 2011

Michael Ratty
| March 01, 2011

World’s Largest Drugmaker Aims to Slash R&D
On February 1st, Pfizer (PFE – Free Pfizer Stock Report) announced it will be slashing its massive research and development budget to deliver on its 2012 earnings forecast. Management indicated it will cut spending by as much as $2 billion, or roughly 25% of its industry-leading $8 billion budget (plans are already in the works to shut down its research center in Sandwich, England). The move to slash costs has been widely anticipated for some time now due to upcoming patent expirations that are expected to wipe out billions of dollars in revenue. The most crucial expiration comes this November, when top-selling product, Lipitor, loses exclusivity. Lipitor generated $10.7 billion in sales last year.

Merck Takes a Different Road
As Pfizer and several other drugmakers are planning budget cuts to aid earnings, the industry’s second largest player, Merck (MRK – Free Merck Stock Report), has decided to take a different approach. Management announced it will limit cost-cutting in the coming years, instead relying on further investment in drug development to drive growth. Given Pfizer and Merck’s differing strategies, it remains to be seen which of the two industry leaders will be most successful.

Sanofi to Acquire Genzyme
On February 16th, French drugmaker Sanofi-Aventis (SNY) entered into a definitive agreement to acquire Massachusetts-based biotech company Genzyme Corp. (GENZ) for $74 a share (or approximately $20.1 billion) in cash, plus future specified payments for Genzyme’s experimental drug, Lemtrada. The initial reaction from the investment community has been rather positive on both sides, with each company’s stock exhibiting modest increases on word of the news. The union appears to be a good fit from a strategic standpoint, particularly for Sanofi. It stands to greatly enhance the company’s capabilities in the field of biotechnology (where it has had a minimal presence), a shift that could help offset the impact of impending patent expirations. The transaction has already gained anti-trust clearance from the European Commission and the United States Federal Trade Commission, as well as unanimous approval from each company’s Board of Directors. The deal is expected to close early in the second quarter.

Supreme Court Rules in Favor of Vaccine Makers
On February 22nd, vaccine manufacturers received a small victory in a case where two parents were suing Pfizer over a vaccine they claim led to their daughter’s seizure disorder. The U.S. Supreme Court ruled 6-2 in favor of Pfizer, citing a 1986 federal law that protects the company against claims that it should have sold a safer formulation. The law was designed to encourage the production of vaccines by limiting the liability for manufacturers. Most injury complaints received are instead channeled into company-financed systems that offer payments to those proven to be affected by a certain product. Although these costs may sometimes be considerable, it appears to be the preferable method among manufacturers, who typically seek to avoid lengthy litigation and negative press. All told, the recent ruling is viewed as a victory for the primary suppliers of vaccines in the United States, which include, Pfizer, Merck & Co., Sanofi-Aventis, and GlaxoSmithKline (GSK).

Generic Drugmakers Back FDA Fees
Generic drugmakers are backing a recent proposal to pay user fees to the government as a means to accelerate the approval of drugs and plant inspections. Industry leaders Mylan Inc. (MYL) and Watson Pharmaceuticals (WPI) have voiced the need to break backlogs at the Food and Drug Administration (FDA), where generic medicines can take about two and a half years, on average, to gain approval. This system prevents generic companies from acting in a timely fashion when a big-named branded drug loses exclusivity. It has become more of an issue of late, as the patents on several high-profile products are set to expire over the next few years. Besides generic drugmakers, the issue of lagging approvals also affects the consumers who rely on increased competition in the market to drive down prices. Fee negotiations with the FDA are scheduled to begin February 28th.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.